The long- and short-term hopes for better days in the Iranian oil industry rested on two meetings in Vienna in November 2014, but both events ended unfavourably for the Islamic Republic.

The lack of agreement between Tehran and the world powers on Iran’s nuclear programme left strict sanctions in place against Iran’s oil sector, limiting exports and preventing the much-needed inflow of foreign investment and expertise.

Although Tehran will be allowed to access an additional $700m a month of overseas assets, there is now no chance of further relief from sanctions until at least 1 July 2015. Even if a deal is reached this year, the removal of sanctions is likely to be a gradual process.

The second decision going against Iran in Vienna was Opec’s move to maintain its production quota at 30 million barrels a day (b/d) in 2015. The decision was backed by leading Opec power Saudi Arabia and its Gulf allies Kuwait and the UAE, and led to the continued fall of global oil prices.

Crude production

The Brent price has now halved since June 2014 to below $55 a barrel in the New Year, exacerbating Iran’s drop in export revenues amid falling production in recent years. According to the US-based Energy Information Administration (EIA), Iranian crude production dropped to 3.19 million b/d in 2013 from 4.21 million b/d in 2011 before the new US-back sanctions were introduced.

The restrictions caused by sanctions in recent years have led to most foreign companies exiting Iran’s oil sector as the risks increased.

Last year, Iran cancelled a $2.5bn agreement with China National Petroleum Company (CNPC) to develop the Azadegan oil field in the southwest of the country. The Chinese group was also replaced by local group Petropars to complete phase 11 of the huge South Pars gas field development.

The lack of interest in entering deals to develop Iranian oil and gas fields and downstream projects has led to the Iranian Petroleum Ministry redrawing the structure of the contracts on offer.

Iran has chosen to scrap the unpopular buyback contracts, under which international oil companies (IOCs) must hand operations over to the state-owned National Iranian Oil Company (NIOC) once production has commenced.

Since the 1979 revolution, 16 buyback contracts were signed with IOCs worth $50bn, including 12 field developments and four explorations.

No incentives

According to Mohsen Shoar, managing director at Dubai-based Continental Energy exploration company, there were several drawbacks to the buyback contracts.

“There are no incentives for IOCs to modify the master development plan (MDP) as the development costs were estimated prior to signing the contract,” says Shoar. “There are no incentives for IOCs to improve recovery, discovery of additional reserves and optimising production targets.”

In addition, the IOCs had no incentives to lower development costs as any overrun was not charged to the IOCs, while NIOC’s ownership of the reserves meant that IOCs had little reason to optimise reserves during exploration.

The new Iran Petroleum Contract (IPC) aims to tackle many of these flaws and is based on the integration of exploration and production operations. Under the contract, exploration is at the sole risk of IOCs, which recoup all the exploration costs once commerciality is established.

The contracts are long term, with exploration lasting seven to nine years and production up to 20 years. IOCs provide the capital and technology with NIOC owning the resources and installations.

NIOC pays the IOC a fee based on production rates, with the IOC receiving crude or natural gas in lieu of the fees. The IOC commits to agreed plateau rates for planning purposes with no penalties if the rate is not met, and could have the opportunity to book reserves.

“The IPC not complete yet; more revisions could come… [it is an] important step forward, but by no means the end of the challenges of working in Iran,” says Shoar.

“The new terms are considerably more attractive and practical for both IOCs and NIOC,” he adds. “Once sanctions are removed, the combination of new contract terms and huge oil and gas potential means a new horizon and a new era in the history of Iran.”

Pre-sanction levels

Iran would be able to ramp up crude production to pre-sanctions levels within a year of the removal of sanctions, according to Mohammad Memarian, head of the petroleum studies department at tthe Petroleum Ministry.

“The government projection is around 5.5 million b/d, which, due to the shortages of foreign investment and technology, becomes a political objective instead,” said Memarian, speaking at a conference in Dubai on 11 December.

But he believes production could reach 4.2 million b/d within a year if sanctions are removed and Iran could then work towards a new output target of 4.8 million b/d after acquiring foreign investment and technical assistance.

However, the major factor remains when and how quickly sanctions can be lifted. Iran’s oil sector is likely to continue to struggle until its leadership can find a compromise on its nuclear programme.